Skip to main content

Bull & Bear Case For Oil Prices




The Bull & Bear case for oil prices:

Jeffrey Currie, head of energy research at Goldman Sachs, made a very bullish case to investors in a presentation on Wednesday. He sees oil at $95 per barrel by December 2010. Even more interesting though were his views on the market’s current inflation expectations, which went a little like this:

A recovery in EM demand growth will push the market back towards effective production capacity by 2011

The equity markets have primarily been pricing in EM growth over the past three months

It is EM growth expectations that have created the rise in inflation expectations and commodity prices

So it’s all about EM growth rather than real fears of inflation back in mature markets. Accordingly, Curries sees the recovery playing out a little bit like this:

2009H1: Bridging the gap to economic recovery
WTI timespreads strengthened as an inventory dislocation was avoided and as the credit dislocation unwound, which allowed a normalization of the WTI timespread inventory relationship.
2009H2: A cyclical bull market as the economy stabilizes
WTI timespreads to continue to strengthen in a cyclical crude oil rally, but OPEC holds the key in the near-term.
2010H1: Long-term shortages generate near-term surpluses
Rising WTI crude oil prices amidst weakening timespreads as long-dated prices rise to motivate investment in non-OPEC production capacity.
2010H2: From financial crisis back to energy crisis
WTI timespreads strengthen once again as dwindling supply leads to a new cyclical rally.

And he agrees with BP’s Tony Hayward that the energy crisis coming our way is actually more political than geological.

---------------

Edward Morse, director of economic research at LCM Commodities.

In a piece published in the latest edition of Foreign Affairs Magazine Morse makes the point that oil only went to $147 per barrel in 2008 because of the coincidental convergence of a number of supply-related circumstances unlikely to be repeated any time soon.

Most oil industry analysts expect high prices to return soon, along with economic recovery. This is probably a mistaken view; more likely, the prices for oil and other commodities will be range-bound again. This would be a happy development, as it would provide unusual opportunities to tame the volatility in prices.

But actually, he says, the key factor behind soaring prices in 2008 was the disappearance of Opec spare capacity:
… in 2002–3, the overhang in production capacity evaporated rapidly and unexpectedly. Some analysts invoked the so-called peak oil theory and blamed the situation on an unprecedented acceleration in the decline of oil production caused by the gradual exhaustion of underground resources. But there were more reasonable explanations for what put pressure on oil supplies. Even those countries with plenty of oil resources suffered political impediments to production that could not easily be removed. Venezuela’s state oil company went on strike in protest against President Hugo Chávez, civil disorder over living conditions in the Niger Delta crippled Nigeria’s oil sector, Iran failed to put in place an investment regime to attract foreign capital, the United States launched a war to oust Saddam Hussein, and resource nationalism in Russia and other non-opec countries reduced production growth.

In short, he says, the virtual disappearance of surplus oil-production jolted the market and the lost cushion surprised both consumers and producers — not least Saudi Arabia, which depends above all on its ‘producer of last resort’ status political clout both within Opec and the world.

With that in mind, Saudi Arabia had a big incentive to raise production. And it did so, remarkably successfully Morse adds, to 12.5m barrels a day by 2009, with another 1m on standby by 2010. That should bring Opec’s total production capacity to 37m per day in 2010 — more than 10m barrels per day above today’s level. Which is why it stands to reason, as Morse states:

The disappearance of spare Saudi production capacity was the most critical element in driving up prices from 2003 to 2008—and its reemergence should be the most critical element in keeping them low over the next three years (or more, if global demand fails to rebound enough). Saudi Arabia wants spare production capacity for multiple reasons, including, importantly, to give it influence in the g-20 (the group of finance ministers and central-bank governors from the leading economies) and other international forums. Riyadh’s ability to increase production is the key to its being taken seriously.

The bullish argument, of course, also focuses on non-Opec production declines squeezing prices again. But here again, Morse disagrees:

For one thing, these analysts ignore the fact that the lead-times in finding and developing oil are long, sometimes as long as ten years. Investments from the past half decade will start to bear fruit over the next few years, which means that even the price downturn of late 2008 will have little impact on supplies in the years ahead.

The Saudi national giant Saudi Aramco massively increased its investments to develop new resources after 2003. So did oil firms large and small throughout the world. But unlike their Saudi and other Middle Eastern state-controlled counterparts, international oil companies did not have an inventory of discovered but undeveloped fields readily available.

They had to go out and find new ones. Some energy analysts have suggested that these firms’ efforts were hindered by diminishing prospects, hikes in production taxes, or moves by the governments of producing states to reserve increasing shares of potential finds for their state-owned firms. In fact, there were plenty of deep-water resources waiting to be tapped—in the Gulf of Mexico; off the coast of Brazil; in the eastern Mediterranean; in the Gulf of Guinea; in the Caspian Sea; oª the shores of India, China, Indonesia, and Australia; and along the shores of Arctic-bordering states (the United States, Canada, the United Kingdom,Denmark,Norway, and Russia)—and oil companies spent increasing sums to do so.

If there was an obstacle, it was not a lack of hydrocarbon reserves— deep-water resources appear to be even more abundant than was thought a decade ago—but a lack of equipment to discover and produce them. Fewer than two dozen drilling vessels (each costing $1 billion) were available in 2000. But as contracts were put in place at the time of very high oil prices, the fleet of vessels started to expand. By 2012, there should be closer to 150 such units available for finding and developing deep-water resources.
Meanwhile, Morse adds, there’s also been major technological advancements allowing for hydrocarbon production in regions previously considered energy deficient — specifically in the form of shale gas out of the United States and Europe. As he explains:
The United States used to be considered a country that would eventually suffer a long-term natural gas deficit and be condemned to import supplies, some piped from Canada, others shipped as liquefied natural gas (lng) from around the world. But high gas prices—as high as $13 per million btus in 2008, some 160 percent more than prices today—have spurred phenomenal developments in technologies to drill for natural gas trapped in shale rock throughout the United States.The Haynesville Shale, in Louisiana, is so large and prolific that even as the use of gas rigs has fallen in other parts of the United States, current activity there makes up for a quarter of the decline elsewhere. Even at today’s lower natural gas prices, total production in Haynesville could increase tenfold by late 2010.What is more, the Marcellus Shale, which stretches from West Virginia through Pennsylvania and into New York,may contain as much natural gas as the North Field in Qatar, the largest field ever discovered. Shale resources in North America are so vast that plans are being made to develop them for export as lng from Canada’s west coast.

Shale resources are also widespread throughout Europe, and in the aftermath of Moscow’s hardball diplomacy vis-à-vis Ukraine in early 2008 and early 2009, interest is growing among European governments to find replacements for Russian supplies.

Finally there’s the demand-side argument. Morse, for example, believes a return to prior growth rates is actually quite unlikely. For one thing, the market is responding to last year’s high prices. Tracking the trend, the International Energy Agency has lowered its estimates for oil demand in 2030: it forecast 106 million barrels a day in its 2008 report, down from 116 million barrels a day in its 2007 report. Projections of future demand will inevitably be cut even further: one extraordinary lesson of the last 60 years is that after every spike in oil prices, demand growth flattens considerably.



p/s photos: Marthasaya Simatupan

Comments

Popular posts from this blog

My Master, A National Treasure

REPOST:  Its been more than two years since I posted on my sifu. This is probably the most significant posting I had done thus far that does not involve business or politics. My circle of close friends and business colleagues have benefited significantly from his treatment.


My Master, Dr. Law Chin Han (from my iPhone)

Where shall I start? OK, just based on real life experiences of those who are close to me. The entire Tong family (Bukit Kiara Properties) absolutely swear that he is the master of masters when it comes to acupuncture (and dentistry as well). To me, you can probably find many great dentists, but to find a real Master in acupuncture, thats a whole different ballgame.


I am not big aficionado of Chinese medicine or acupuncture initially. I guess you have to go through the whole shebang to appreciate the real life changing effects from a master.


My business partner and very close friend went to him after 15 years of persistent gout problem, he will get his heavy attacks at least…

PUC - An Assessment

PUC has tried to reinvent itself following the untimely passing of its founder last year. His younger brother, who was highly successful in his own right, was running Pictureworks in a number of countries in Asia.

The Shares Price Rise & Possible Catalysts

Share price has broken its all time high comfortably. The rise has been steady and not at all volatile, accompanied by steady volume, which would indicate longer term investors and some funds already accumulating nd not selling back to the market.


Potential Catalyst #1

The just launched Presto app. Tried it and went to the briefing. Its a game changer for PUC for sure. They have already indicated that the e-wallet will be launched only in 1Q2018. Now what is Presto, why Presto. Its very much like Lazada or eBay or Alibaba. Lazada is a platform for retailers to sell, full stop. eBay is more for the personal one man operations. Alibaba is more for wholesalers and distributors.

Presto links retailers/f&b/services originators with en…

How Long Will The Bull Lasts For Malaysia

Are we in a bull run? Of course we are. Not to labour the point but I highlighted the start of the bull run back in January this year... and got a lot of naysayers but never mind:






























p/s: needless to say, this is Jing Tian ... beautiful face and a certain kind of freshness in her looks and acting career thus far



http://malaysiafinance.blogspot.my/2016/12/bank-negara-may-have-switched-on-bull.html


I would like to extend my prediction that the bull run for Bursa stocks should continue to run well till the end of the year. What we are seeing for the past 3 weeks was a general lull where volume suddenly shrunk but the general trend is still intact. My reasons for saying so:

a) the overall equity markets globally will be supported by a benign recovery complemented by a timid approach to raising rates by most central banks

b) thanks to a drastic bear run for most commodities, and to a lesser extent some oil & gas players, the undertone for "cost of materials" have been weak and has pr…